The 800,000 federal employees being asked to work without pay or to stay home during the record-setting government shutdown are feeling the effects: So far, each of them has missed more than $5,000 in wages on average, the New York Times reports .
For many workers, this is "an emergency situation," says personal finance expert Suze Orman. That's why she's giving those affected permission to consider breaking a key money rule and borrowing from a retirement account.
But no matter how cash-strapped you may feel, there's one option she implores you to keep off-limits: a payday loan .
"I am begging all of you, do not take a payday loan out," she said on a special episode of her podcast "Women and Money" for federal employees affected by the shutdown. "Please don't do it. If you do it, it will be the biggest mistake you have ever made."
What is a payday loan?
Also called cash advances, payday loans are typically small loans — generally for $500 or less — that, depending on where you live, can be easy to get. You normally owe the balance of the loan, plus the service fees and interest, two weeks later, on your next pay day.
The problem with payday loans is that they're often incredibly expensive : The national average annual percentage rate (APR) for a payday loan is almost 400 percent . To put that into perspective, the average credit card APR is currently 17.47 percent, according to CreditCards.com.
Because the terms of these loans can be hard on borrowers, some states either ban them outright or have regulated them by, for example, instituting laws that limit the APR to 36 percent or less . But most states still allow high-cost payday lending .
Orman isn't the only expert who says that, even if you can get a payday loan, it's probably a bad idea.
As personal finance expert and columnist Michelle Singletary puts it , "Payday lenders are sharks," and payday loans are a "horrible" business model for most people.
And, as data from the Consumer Financial Protection Bureau indicates, however convenient a solution they may seem in the moment, payday loans are unlikely to solve your problem: "More than four out of five payday loans are re-borrowed within a month, usually right when the loan is due or shortly thereafter."
Plus, "nearly one in four initial payday loans are re-borrowed nine times or more, with the borrower paying far more in fees than they received in credit."
What are your other options?
Here are safer ways federal employees can get the money they need, according to Orman:
- Max out your credit card , but commit to paying off your balance in full as soon as you get your back pay and start receiving your regular paycheck again.
- Withdraw your original contribution from your Roth IRA . You can usually take out the sum you originally put in without owing taxes and penalties.
- Take a loan from your Thrift Savings Plan (TSP) . If you're eligible to borrow from your TSP retirement account, you can usually do so without having to pay taxes or a penalty. Note that you have to pay yourself back, plus interest, within one to five years .
You could also try PayPal: The company recently announced that it will offer interest-free one-time cash advances up to $500 to federal employees affected by the shutdown. The company will fund a total of $25 million in cash advances for the program.
Other smart steps to take include calling your creditors — for your mortgage, car or credit cards, for example — and telling them you're not getting a paycheck. Ask for an extension, Orman says: "Because remember, if you are late on your payments, that counts against you for your credit score."
And in the meantime, she says, be careful with your spending: "Every single penny has to go for something that you need," which means skipping extras like the movies and dining out for now.
"These are ways for you to access money that you may have that you didn't even know," she says, which "hopefully could get you through."
Don't miss: Suze Orman says federal employees are in an emergency and can consider breaking a key money rule
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